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Annual prepayment is a defensible choice for a subscription product. It has one consequence that does not show up for a year — and then arrives all at once.
Annual prepayment is a defensible choice for a subscription product. It has one consequence that does not show up for a year — and then arrives all at once.
It fixes cash flow, because the money arrives up front. It cuts churn during the year, because the customer never has a monthly moment of deciding to stop. For some products it is clearly the right call. What nobody writes down is what it does to year two.
Contracts signed in one quarter also renew in one quarter. A company that sold well in year one therefore has no smooth renewal curve, but a single date on which a large part of next year is decided. If renewal churn is thirty percent — not unusual for an annual media subscription — thirty percent of revenue leaves at once, not gradually.
Gradual churn can be made up continuously. A cliff cannot, because the sales team has one quarter to cover it and must hit the new plan in the same period. The company ends up in a position where the hardest quarter of the year is also the one with the least spare capacity.
Spread the renewals. Offer some customers a six-month cycle, move some contracts by a month or two, or deliberately stagger renewal dates at signature. It costs a little cash flow in year one and saves one panicked quarter in year two.
This piece came out of a specific engagement. The client name and their numbers are not in it and will not be — we publish only what holds generally.
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